Five issues facing China's Belt and Road Initiative

Xi Jinping's pet project will have some successes but its ultimate goal could be a stretch too far

This year, Chinese freight trains have made pioneering journeys to the U.K. from Yiwu in Zhejiang Province, eastern China, and from the Xiamen Free Trade Zone in southeastern Fujian Province to Moscow. These are among the latest examples of developments in the Belt and Road Initiative, also known as the Silk Road Economic Belt and 21st-Century Maritime Silk Road, and as the One Belt, One Road initiative.

Whatever we call it, this is Chinese President Xi Jinping's pet project, launched in 2013. Xi will host a BRI summit in Beijing on May 14 and 15 amid great fanfare about trade and infrastructure achievements and prospects. But what is the BRI, and is it a game-changer for China's role in the global economy?

A plethora of research papers and articles note that the BRI reaches into 65 countries populated by 4.4 billion people and accounting for 30% of world gross domestic product. These countries generate more than a third of world trade, and require roughly $5 trillion worth of new infrastructure in the next decade.

The size and scale of these numbers are meant to impress, and to evoke a past era when China was at the heart of the world economy. Reciting geoeconomic facts, though, does not really convey anything of significance. An orchestra pit without musicians and music is just an orchestra pit.

China certainly has the financial resources and the state enterprises to help fund and build some of the $26 trillion of infrastructure that the Asian Development Bank says is required by 45 nations in Asia by 2030. That equates to annual spending of $1.7 trillion, double the current rate.

The BRI is a sort of umbrella concept for things like trade deals, increased international use of the yuan and cultural exchanges, but its major importance lies in its potential impact on infrastructure, such as oil and gas pipelines, roads and railways, bridges and tunnels and sea- and air-ports.

My own view is that the BRI will unquestionably live up to some of its expectations. It is financed by a $40 billion Silk Road Fund, backed by the China Investment Corporation, China's sovereign wealth fund, China's three policy development banks and the State Administration for Foreign Exchange.

In terms of potential size, it is much bigger than the U.S. Marshall Plan at the end of World War II

Additional loans will be made by the policy development banks, to which the central bank has transferred $82 billion of extra capital, and the China-sponsored Asian Infrastructure Investment Bank, a credible and transparent institution that co-finances projects with other official development agencies.

Yet, away from the marketing pitch, we do not really know the main purpose of the BRI. In terms of potential size, it is much bigger than the U.S. Marshall Plan at the end of World War II, which amounted to about $130 billion in today's money. But this begs the key question: is the BRI a Eurasian economic development project? Or is it primarily a Chinese foreign policy and international relations project designed mainly to benefit China?

A Eurasian development project would suggest strong Chinese leadership objectives to which Beijing would subordinate many of China's national interests, and for which it would establish an acceptable structure of institutional rules and governance. This does not seem to be on the agenda.

Rather, it seems that China wants to leave its geopolitical footprint and derive commercial and economic gains. Infrastructure and economic projects would help to integrate China's poorer western provinces and its center of heavy industry in Manchuria, and secure energy pipeline networks in central Asia and Russia, with deep-water ports in south and southeast Asia. The initiative also offers state enterprises the chance to move excess capacity overseas, and it will promote Chinese manufacturing products, markets and processes.

Mutually incompatible

The Eurasian and China-centric objectives are not mutually compatible, and, in any event, raise a number of issues.

First, the BRI has become a catch-all for numerous projects and ideas, not all of which are new. Many have been underway for a while, and been co-opted into the initiative. For example, work on the China-Pakistan Economic Corridor, linking Kashgar in western Xinjiang with the Arabian Sea port of Gwadar, dates from 2002. The Padma Bridge project in Bangladesh was put out to tender in 2010.

Second, building infrastructure, especially in countries with low or less than investment grade credit ratings, often generates efficiencies and savings only if accompanied by below-the-radar improvements. Better transportation links, for example, also need ancillary and spur links to road and rail systems, efficient customs and administration procedures, legal infrastructure for loading and unloading resources and supplies, and storage and distribution infrastructure.

All infrastructure construction projects are liable to succumb to corruption and poor governance problems that undermine commercial viability or discourage important sources of finance -- for example, the co-financing that comes from official development agencies. This is a topic with which China and many BRI countries are very familiar.

Third, the BRI is so big and diffuse that it lacks focus, and demands unusual co-ordination. The National Development and Reform Commission is the lead agency, but the BRI has also been incorporated into China's national economic development strategy, the 13th Five Year Plan, and local and provincial government economic plans. The State Council, the National Security Commission, the commerce and finance ministries, and the Leading Group on Comprehensively Deepening Reform are just the most senior of an array of agencies with vested interests in the evolution of the BRI.

Fourth, political issues and arguments in and among BRI countries are not uncommon. Russia, for example, is ambivalent about the BRI, given the long-standing rivalry between Moscow and Beijing for influence in Central Asia. India also has issues with the BRI. Its former National Security Adviser, Shivshankar Menon, said recently that the China-Pakistan Economic Corridor was "not acceptable to us." European countries have also become more resistant to attempts by Chinese companies to buy into or take over strategically significant firms or sectors.

Fifth, China's own economic situation is not especially helpful to its sponsorship of the BRI. Concerned about the scale of capital outflows, reserve depletion and currency depreciation in 2016, China tightened foreign exchange and capital outflow controls late in the year, including on companies undertaking foreign investment and lending.

Moreover, given the level and pace of credit creation in China, it is only a question of time, perhaps no more than 2-3 years, before it will endure some form of deleveraging, which is likely to presage a protracted period of low growth and currency depreciation. When this happens, the BRI is most likely to take a back seat for a while as new lending programs are scaled down.

Ultimately, the BRI represents the president's attempt to fuse economic and political diplomacy, and to provide a strategic focus for Chinese companies, especially state-owned enterprises, to look abroad for new markets and investment opportunities. China, though, is no stranger when it comes to politics getting the better of economic and commercial pragmatism, especially under Xi.

The BRI is challenging, if nothing else. The deployment of China's immense physical and financial capital will doubtless improve the lives of many people, but serious doubts abound as to whether it will be implemented effectively, or realize its architect's ambitions.

George Magnus is an associate at Oxford University's China Centre, and former chief economist at UBS.